Demographics

October 16, 2008

The debates and campaigns for the presidency certainly give us an opportunity to learn about the candidates and their parties. Many. many people become political junkies during this period. Each election brings new insight and hopefully understanding. What is just as interesting to me is what we learn about ourselves.

I was frankly astonished at the results of the last presidential election. A significant number of the people who now hold Bush in low regard voted for him four years ago. Yet to my knowledge nothing happened in the second term that was not at least very clearly telegraphed in the first term. Concern about the economy was clearly expressed four years ago. Nobel Prize winning Paul Krugman (among others) has been prominently and clearly talking about the failures of Bush’s economic policies for years.

Actually as early as the late stages of the Clinton administration people were beginning to express concern about credit default swaps and the health of the financial industry. Four years ago we knew pretty much as much about our foreign policy and its flaws as we know now.

So I have to confess, not only was I surprised at the 2004 election results, but I have been surprised by the strength of the present aversion to Bush and his policies. It seems like Bush is being scapegoated a bit. No one can say that Bush did anything unexpected in his second term. His second term, like his first term, is defined by ideological inflexibility. We voted ourselves into this situation. I just don’t buy blaming Bush for our problems when we chose him with our eyes open.

In the current election, Gallup just came out with interesting polls that show demographic results. The economy seems to be driving voters to Obama. As I see it the well publicized miscalculations of the McCain campaign are not the reason for his decline in popularity. Rather they have merely impeded his ability to overcome the devastating effect of the economy on his campaign.

One thing the Republicans have been absolutely lock-step about is the deregulation of the financial industry and the deregulation of corporate activity in general. It is hard to imagine any proud advocate of this policy (such as McCain) being embraced by the population at the time of the catastrophic exposure of the consequences of this policy.

The Gallup survey shows that Obama for the first time now has a lead among male voters and for the first time among elderly voters. In September he gained a lead among college graduates and has always had a substantial lead among people who extended their education beyond college. This is all consistent with the broader polls.

One of the features of this campaign that is interesting of course is the fact that an African American is running for the first time. In that light it is interesting that McCain still has an edge among white voters. It is a steadily declining edge and no longer a clearly significant preference, but white voters as a group are showing more reluctance to vote for Obama than other demographic groups. This, I guess, is not surprising but it is a little startling to see.

I would not attribute this to racism, as that term is commonly used, but perhaps to unexplored precognitive associations. A good exercise I think for undecided whites or whites not strongly disinclined to vote for Obama is to imagine that things were reversed.

Imagine that McCain, instead of being at the bottom of his class had been at the top and had been Editor of the Harvard Law Review.

Now imagine that Obama barely graduated from college. Imagine that 15 years ago was deeply involved in a savings and loan scandal that cost tax payers hundreds of billions of dollars. Imagine that he was an ardent champion of deregulating the financial industry, and that all of the unpleasant aspects of Senator McCain’s personal life were a part of Obama’s life instead. Imagine that he had an unwed pregnant teenage daughter and had been found to have committed serious ethics violations while in the legislature.

If you can do this kind of switch and say that it really would not matter to you, or that your attitude about these things would the same for both candidates then I think you can say that you are not laboring with the precognitive associations of the sort I’m talking about.

I by no means am suggesting that a white’s disagreement with Obama is racially influenced. It is just that the polls suggest that in about one out of ten cases that could be an unexamined influence.

Another interesting poll result is that Obama lags among the group of people that attend church at least once a week. This is the group in which McCain is strongest. His is up 16 points there. I do not have the polls that predate the Republican convention but by all accounts Palin has firmed up McCain’s standing in this group. My guess here is that people who attend church the most tend to be more zealous and that among the zealous, McCain’s opposition to Roe v. Wade wins him the support of most people in the group. I’m presuming that this group is mostly a single issue group. If I’m wrong then the poll results would become even more interesting.


S. 190: It Has Attained Myth Status

September 30, 2008

McCain spent months during the nomination process trying to convince us he was against all government regulation.  “I’m always for less regulation,” Wall Street Journal quotes him saying six months ago. He added: “I’d like to see a lot of the unnecessary government regulations eliminated.”  He now is now suggesting that he has been championing legislation that would have created regulations sufficient to have avoided the present crisis.  I have not seen McCain explicitly make such a far-fetched claim, but certainly many of his supporters seem to believe this.

McCain has pointed to his sponsorship of S. 190 in 2006 to show that he is not as hard line as he presented himself earlier.  His supplicants seem to have picked up this ball and run right out of the stadium with it.

Some people have actually claimed that the present crisis would have been averted if “McCain’s bill” had passed.  We have to stop right there.  McCain did not even believe that the scope of the bill could have such an effect when he endorsed it.  The bill was written in response to an accounting scandal that rocked Freddie Mack and Fannie Mae. In the best of all circumstances the bill would have helped avert (this is hotly contested) the bailout of Fannie Mae and Freddie Mack, but that had happened before the current crisis.

In his speech in which he announced his sponsorship a year and a quarter after the bill was introduced, he said”

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

He does in his concluding sentence allude to problems for the economy if effective regulations are not implemented but this was not the focus of the speech at all.

At this point in time some form of the bill was on the floor of the Senate and it was capable of being voted on but it was entirely ignored had would never be voted on.  An amended form of the bill came out of the committee but to my knowledge there is no record of the bill as was when it emerged from the committee.  There is only the notation that it was changed.  Significantly omitted from McCain’s four minute speech is any encouragement that it be voted on, whatever it was.

Many people say that the Democrats filibustered this bill to prevent the Republicans from passing it.  There is simply no record of that at all.  Others say that it was the threat of a Democratic filibuster that prevented the bill’s passage and I have been unable to turn up any hint of that either.

The truth is that a significant number of Republicans opposed the bill.  The American Enterprise Institute was against it.  It is hard to imagine that this opposition was not reflected in the attitude of the majority of Republican senators.  Furthermore one of the most prominent lobbying groups for deregulation was opposed to it.  In this light it is easy to see why no Republicans were championing the bill at all.  Nor to my knowledge were any Democrats in the Republican-controlled senate.

Because the bill was fated to wither on the legislative vine and die unvoted upon in a few months, McCain vote was entirely safe.  He could create the appearance of a record without doing anything or even voting against the Republican “base.” The proof of the political purpose of his sponsorship, as opposed to substantive support, is that the bill was reintroduced in 2007 without McCain sponsorship or support.

The sole remaining deviation from McCain’s record of voting to deregulate Wall Street and the financial community was with respect to the Sarbanes-Onley bill, which in the wake of corporate accounting scandals required enhanced reporting.  After passage this fell on harsh criticism from corporate executives and McCain said that he regretted voting for it.

Other than these two minor deviations, I believe that McCain until now has been an ardent proponent of deregulation.


Nagging Questions About the Bailout

September 30, 2008

Here’s an interesting bit of information from the New York Times. Democrats who voted for the bailout received appreciably more money form Wall Street than the Democrats who voted against it.

This once again brings to mind that the political division is not between Republicans and Democrats but between politicians serving corporations and those who are unaffiliated in that sense.

I do not understand the situation enough to be for or against the bailout but it is noteworthy that in this time of crisis there is a correlation between votes and campaign contributions.

I’m still struggling with understanding how at-risk home mortgages which total — according to everyone I know of — $112 billion can require $700 billion to remedy and the remedy as far as I can understand has nothing to do with making good on the mortgages that are supposedly the root of the problem.


Where is the Money Going, Part 2

September 26, 2008

I do not think that anyone knows where the money is going.  The Democrats do not seem ready to undertake that analysis, bending to the administration’s cries of urgency.  I myself am not prepared to surrender reason to threats of disaster just yet.  The Washington Mutual takeover after was conducted by the administration the moment it unexplained plan bogged down.  The timing is not above suspicion, but unquestionably WaMu was in serious trouble.

Congress has put restraints on this massive corporate welfare program by insisting that the money be paid in installments (almost entirely to corporations who claim they are in trouble because home loans are not being paid, so why not help with those payments instead?) and with Congressional oversight.  Still nobody knows where the money is going which seems to have become a theme of this administration since the Iraq invasion.

Marie Cantwell and Joe Lieberman issued this press release quoted below.

WASHINGTON, DC – Today, U.S. Senators Maria Cantwell (D-WA) and Joe Lieberman (ID-CT) sent the following letter to Senator Reid, Senator McConnell, Speaker Pelosi, Representative Boehner, Senator Dodd, Senator Shelby, Representative Frank, and Representative Bachus, asking them to ensure there are clear mechanisms for long-term transparency, accountability, and reform in the current financial recovery package.
“Any financial recovery package that Congress enacts must put transparency and tough rules in place to make sure consumers are protected,”said Cantwell. “While the financial markets need emergency surgery today their long-term health is dependent on prevention. We need to establish a robust regulatory regime capable of overseeing today’s complex global marketplace.  We also need to determine what went wrong, hold bad actors accountable and apply the lessons learned to prevent future financial market meltdowns.
In addition to protecting homeowners and taxpayers and holding Wall Street executives accountable, it is critical that the financial rescue package jumpstart the process of fundamental reform of our financial markets so that we never again find ourselves in this position.  Under our proposal, in four months, the National Commission for Financial Regulatory Reform will provide Congress with a specific plan for comprehensive reform of the financial system that will strengthen the stability of our financial infrastructure and protect the long-term interests of American taxpayers, investors, and businesses.  With the Commission recommendations in hand, the next Congress will be able to immediately begin moving forward with the fundamental reforms we desperately need,” said Lieberman.
This does nothing to explain where the money is going and admits that we do not know how we got here.  There being no explanation of where “here” is it appears that Congress may be almost as much in the dark as we are.
It remains unclear why just paying off the $112 billion of troubled home mortgages, or loaning enough to keep them current, would not solve the problem.

The Construction Industry

September 22, 2008

The housing industry was hurting last spring before the most recent economic difficulties.  Housing starts were already at a fifty year low.  Commercial construct enjoyed a better fate but it appears that the home loan crisis has served to dry up money for commercial projects.

Bloomberg reports:

The recent collapse of Lehman Brothers and Merrill Lynch will make it even more difficult for borrowers to refinance commercial real estate loans.

According to UBS AG, the world’s largest manager of private wealth assets, eight of the top 10 investment banks accounted for about half of the loans packed into commercial mortgage-backed securities in 2006 and 2007. As of today, the eight are now either merging with other companies, no longer in business, or significantly reducing their real estate holdings.

By the end of 2012, UBS analysts anticipate a competitive market and estimate that almost $151 billion in commercial mortgage loans that were underwritten by investment banks and securitized will be due.


Housing Market at 50 Year Low

June 24, 2008

If you are interested in the current housing market and wish to read more, an excellent place to look is Harvard’s Joint Center for Housing Studies, which just this week came out with the best study that I have seen. The study says that the housing market has not been this bad in fifty years. Again, the report addresses the national problem.

It is a little stunning to see the map showing areas where permitting is down by more than 50%.  Nonetheless the report notes the historic ability of this market to spring back and lead economic recovery.  It says the forecast over the long term remains very good.


Equity Skimming in Washington: A Brief History

June 7, 2008

There are three main reasons that real estate has attracted so many unscrupulous people in recent years.

First it is an asset that can be highly leveraged. Homes can be purchased for a relatively small amount down and the balance financed. When property goes up in value this confers wild profit on the owner. For example, say you buy a home for $100,000 and pay 10% down. When the transaction closes you have purchased a $100,000 asset for an expenditure of one tenth its value. Putting aside transactional costs, if the property increases in value 25%, you have gained $25,000 in value on an original investment of $10,000. You more than doubled your money on a 25% increase in value of the asset.

The second aspect that attracts the criminally inclined, is that these very valuable assets are often owned by people who are not sophisticated in real estate financing. This is an area where people typically just given themselves to the grinding wheels of commerce without knowing a lot about what is going on in a real estate transaction. Thus there is great opportunity for duplicity behind a mask of convention.

This area is also relatively unpoliced. In the early 1900’s the scam of choice was securities fraud. So many people were falling victim to fraudulent securities schemes that the federal government created the Securities Exchange Commission and in the 1930’s passed legislation imposing severe penalties for securities fraud and implementing broad disclosure requirements.

Many equity skimmers would probably have been selling bunko stock one hundred years ago. The equity skimming schemes of today occupy a relatively unpoliced area without much in the way of legislation (although states such a Washington are passing legislation to thwart this form of fleecing). In short home sales is an area where a lot of money passes hands, there is potential for fast profit and there is not a great deal in the way of scrutiny — similar to stock sales before the Security Exchange Commission.

There have always been lots of real estate scams but for our purposes the story starts in the 1970’s. There was a recession in the early 70’s (or something that looked remarkably like one). An average house in Seattle could be purchased for $15,000, due in large part to local economic problems. This was followed by a period of inflation and breathtakingly high interest rates.

The inflation encouraged people to sell their real estate profitably, but the high interest rates prevented many people from getting loans to buy real estate. These pressures created an era of seller financing. The buyer would give the down payment to the seller and make monthly payments to the seller with an agreement to pay the purchase price off in full in three to five years, when financing could be obtained. This sort of arrangement was commonplace.

The buyer got the house and with it the obligation to pay payments to the seller and the obligation to continue to pay the seller’s mortgage. The buyer could assume FHA loans but usually the buyer just agreed to make the payments for the seller after the sale. The malevolent instincts that had been somewhat suppressed by federal laws in the area of securities sales were revived in this situation.

All sorts of bad things happened. Crooks would buy homes with faulty seller financing documents so sellers could not foreclose if they were not paid by the buyer, while at the same time they remained obligated on the mortgage which the buyer might choose not to pay. Companies were formed that bought real estate on seller financing, then just stripped the property of everything of value and left the barren property for the sellers to foreclose upon.

Seller financing deals could be structured to protect the seller, but there is always a portion of the population that does not consult a lawyer before entering into a transaction of this sort. It is this group around which financial vultures circle.

There was nothing of the magnitude of the massive systematic fraud of recent years, so the legislature was relatively slow to address the problem of equity skimming. In 1988 Washington passed a law that criminalized equity skimming and declared it to be a violation of the Consumer Protection Act. The forward to the bill states in part:

The legislature finds that persons are engaging in patterns of conduct which defraud innocent homeowners of their equity interest or other value in residential dwellings under the guise of a purchase of the owner’s residence but which is in fact a device to convert the owner’s equity interest or other value in the residence to an equity skimmer, who fails to make payments, diverts the equity or other value to the skimmer’s benefit, and leaves the innocent homeowner with a resulting financial loss or debt.

Financial institutions had their hands full in the 1980’s. Seafirst Bank, the biggest bank in the Northwest was going bankrupt until it was purchased by Bank of America. Other big banks swallowed smaller ones into the nineties. Two of the biggest Seattle banks, Peoples Bank and Old National Bank, were bought by U.S. Bank of Oregon and merged into U.S. Bank of Washington. This activity seemed to occupy attention much more than occasional fraud on homeowners.

The opportunity for homeowner fraud errupted like never before during the Bush Administration. The administration’s laizes faire, anti-regulation bias allowed this situation to reach international economic crisis proportions, despite obvious abuses all along the way. (The policies that created the situation were constant between Clinton and Bush, but Bush’s response to the financial crisis made Katrina relief look adequate and timely.)

The subprime era was awash in home loan money; lenders could hardly give it away fast enough. Home loans were obtained without a great deal of review for as much as the full purchase price of a home. This was like a petri dish for raising a culture of financial fraud.

People were so eager to get at the money there were numerous seminars given on equity skimming. Small fortunes were made on the price of admission alone. These week-long seminars were packed with local real estate people, real estate agents, brokers and miscellaneous others. People from Seattle, Everett, from all over the Western part of the state attended.

Recently indicted Charles Head (California based) advertised on the internet, sent faxes to mortgage brokers and people in the real estate industry and nurtured relationships with lenders and escrow companies. He had dozens of companies that were nothing more than names to confuse the public. Sometimes the companies described themselves as facilitators, sometimes as lenders, sometimes as lenders’ agents, sometimes buyer’s agents, sometimes both lender and buyer’s agents and often not at all.